Ukraine’s economic growth will continue in 2024 on the back of expanding domestic demand and a further recovery in seaborne exports, but it will fall to 3.9% from around 5.5% last year due to the high base effect created by the past strong agricultural season, international rating agency S&P Global Ratings forecast.
“Absent a significant escalation of the war, we forecast Ukraine’s economy to grow by about 4-5% on average over the medium term, but a recovery to pre-war levels is unlikely in the foreseeable future,” it said in its release on Saturday night as it downgraded Ukraine’s long-term foreign currency rating to ‘CC’ from ‘CCC’ with a negative outlook amid an expected Eurobond restructuring.
S&P estimates that average annual inflation will fall to around 7% this year from 12.8% last year, but it will pick up in the second half of this year amid weakening base effect, recovering domestic demand and moderate currency depreciation.
The agency expects the hryvnia to depreciate to 41.02 UAH/$1 at the end of this year and to 43.89/$1 at the end of next year.
S&P emphasizes that the development of the war with Russia continues to shape Ukraine’s macroeconomic outlook. It is unclear how the war may evolve, but we believe a military stalemate without any major changes on the front lines remains the most likely scenario as both sides resign themselves to a protracted war. The prospect of any negotiated peace plan seems unlikely. As a result, we assume that the active phase of the war will last until the end of this year, and most likely beyond,” the document says.
The agency recalls that Russian troops have occupied about 15% of Ukraine’s territory, which accounts for about 8-9% of its pre-war GDP, 14% of industrial and 10% of agricultural production. Almost a third of Ukraine’s population has been displaced and about 15% have fled the country and are now refugees living mainly in the EU.
Nevertheless, according to S&P’s baseline scenario, the Ukrainian government and the NBU will maintain their administrative capacity even in the face of serious military attacks.
Given the significant damage to physical and human capital, Ukraine’s medium-term economic prospects are subject to a high degree of uncertainty, the agency notes. In its view, the key factors determining the country’s recovery prospects are the evolution of the war, post-war demographics and labor market profile, as well as the effectiveness of reconstruction efforts and continued international support.
S&P notes a high degree of uncertainty about the scope, outcome and consequences of the Russia-Ukraine war. In its view, regardless of the duration of hostilities, the associated risks are likely to persist for some time.
As reported, the National Bank of Ukraine in January estimated the country’s GDP growth in 2023 at 5.7% and maintained its 2024 growth forecast at 3.6%, slightly worsening it for 2025 – from 6.0% to 5.8%.
The government, when approving the draft state budget for the second reading in early November 2023, improved last year’s GDP growth estimate from 2.8% to 5%, but worsened it for 2024 from 5% to 4.6%.
S&P Global Ratings forecasts that growth in Ukraine is set to accelerate further to 3.1% in 2018, and through to 2021, the agency expects average real GDP growth of about 2.9%, S&P said in a report affirming the country’s ratings issued on April 20. In the previous report dated November 10, 2017, S&P expected that GDP this year would grow by 2.6% with the acceleration to 3% and 3.2% in 2019 and 2020 respectively. S&P said that economic recovery continues to be driven by strengthening domestic demand, high commodity prices, and the economy’s ability to quickly adapt to the Donbas trade blockade. Growth drivers in the Ukrainian economy will remain broadly unchanged, with domestic demand as the main contributor.
Notwithstanding macroeconomic improvements, Ukrainian per capita wealth levels remain low.
“Despite two consecutive years of growth, per capita GDP ($2,600 in 2017) is still only at 67% of its pre-crisis wealth levels in 2013 and the second-lowest in Europe and the Commonwealth of Independent States after Tajikistan,” S&P said.
According to S&P, low income levels also explain high levels of net emigration. Over one million Ukrainians worked in Poland last year, with several hundreds of thousands in other neighboring countries.
“There are reports that this has caused shortages of qualified labor in western Ukraine, for instance, where a successful automotive industry cluster has been established over the past few years,” S&P said.
S&P also reviewed expectations for the hryvhia exchange rate for year-end: from UAH 27.3/$1 to UAH 29.5/$1. In addition, if earlier the agency expected that at the end of 2019 and 2020 the hryvnia exchange rate would remain stable at UAH 27.5/$1, now it expects that it would weaken by the end of next year to UAH 30.5/$1 with further strengthening to UAH 29.8/$1 by the end of 2020 and UAH 28.8/$1 by the end of 2021.
“Over our 2018-2021 forecast horizon, we still expect slightly higher current account deficits averaging 2.7% of GDP. Strong import demand–due to the domestically driven economy, volatile commodity prices, and risks to external trade from rising protectionism–could underpin these higher deficits,” S&P said.
As for inflation, the agency slightly worsened it for 2018 – from 8.7% to 8.9%, and improved for 2019 and 2020 – from 8% and 7.5% to 7.5% and 7% respectively.
“Given our forecast of continued deprecation pressures on the Ukrainian hryvnia, which pushes up import prices and inflationary pressures, especially from food prices, we forecast that inflationary pressures will persist over the medium term, though inflation will move closer to the NBU’s target of 6% plus/minus 2% in 2018,” the S&P analysts said.
S&P pointed out efforts of the NBU to curb inflation: the NBU continues to fight inflation, with four successive key policy rate hikes to 17% over the past six months.
Ukrainian exporters frequently hit export quotas early in the year. Moreover, meat exports, especially poultry, to the EU have an inflationary impact complicating the NBU’s task of reducing price inflation within its target band, S&P said.